1. Field
Embodiments of the present invention generally relate to the field of financial advisory services. In particular, embodiments of the present invention relate to systems and methods for preparing an investment plan (e.g., a retirement plan that may have a limited universe of bond funds) for creating a steady lifetime income stream by implementing an in-plan flexible income stream generation mechanism and creating and managing an annuity reserve.
2. Description of the Related Art
Retirees desirous of a lifelong, predictable income stream may be steered toward various types of retirement annuities, such as immediate or longevity annuities, for example; however, the guaranteed payments of an annuity are accompanied by a loss of flexibility in terms of liquidity.
In order to preserve ongoing liquidity, investors may manage fixed-income investments by building a ladder by dividing his/her investment dollars among bonds or certificates of deposit (CDs) that mature at regular intervals. Ideal investments for supporting retirement payouts or a service for creating payments, which fund a series of equal, periodic, nominal-paychecks (e.g., distributions/payouts) for a desired number of years, T, are zero-coupon US Treasury bonds (“zeros”). If zeros of all maturities between one-year and T-years were available to a particular investor, one could statically replicate any annual payment stream without interest-rate risk. Alternatively, a constant maturity Treasury (CMT) bond (an idealized bond whose maturity never changes) with maturity t can be synthesized by purchasing a zero of maturity t, holding it for a length of time Δt, selling this holding (a bond with maturity t−Δt), purchasing a new t-year, zero and repeating the cycle every Δt years. For yearly rebalancing, a set of CMTs with maturities between one-year and T-years can be used to dynamically replicate the payouts from zeros.
Notably, however, most 401(k) plans lack both zeros and CMTs as investment options. The bond assets available in most 401(k) accounts are bond mutual funds, which do not readily lend themselves to the task of securing a steady stream of payouts.
Consequently, there is a need in the art for determining (i) the capital required to fund a stream of payments from an account having a limited number of investment options and having restrictions on the allowed investment strategies and (ii) a feasible portfolio and ongoing rebalancing to support the funding.